The war in Ukraine has put a lot of focus on the global energy markets, especially the market for liquified natural gas (LNG), observes Tony Daltorio, editor of Market Mavens.
One big beneficiary of the mad scramble for American LNG: Sempra Energy (SRE). Sempra is a utility and energy infrastructure company focused on electric and natural gas infrastructure. The company's goal is to become North America's premier energy infrastructure company.
Its Sempra LNG subsidiary is a gas infrastructure company and developer of liquefaction facilities in North America. In addition to LNG, Sempra's core strength lies in its transmission investments, added to its regulated utilities segment. Sempra's energy transmission business is weighted toward natural gas delivery in California, Texas, and Mexico, all regions with high population growth.
Sempra's two regulated utilities include SoCal in California, with more than 22 million gas customers, and Oncor, the largest regulated utility in Texas, with 10 million customers. It also has a strong presence in Mexico with IEnova infrastructure. Business in Texas is particularly doing well, too, thanks to Texas' aggressive wind generation build-out.
The company has strengthened its balance sheet by selling a 20% interest in Sempra Infrastructure Partners to private equity firm, KKR. It completed the $3.4 billion sale in October 2021. Sempra is also selling an additional 10% stake in this business to the Abu Dhabi Investment Authority (ADIA) for $1.8 billion.
Sempra expects to close on the acquisition of 96.4% of IEnova, a joint venture company that develops and operates energy infrastructure in Mexico. As an early and large investor in the Mexican energy sector, Sempra could see an outsized share of new development projects as Mexico's energy market deregulates.
Sempra and LNG
Sempra's LNG terminals and pipeline give it exposure to a growing market for natural gas in the U.S., Mexico, and the rest of the world. As analysts at Morningstar report: "We believe Sempra's LNG terminal has some moat-worthy characteristics, given its very low cost basis relative to world LNG supply, long-term contracts, and favorable location."
I like the fact that Sempra management limits its risk with LNG development in a very smart way — by entering into long-term contracts with creditworthy partners, many of which also become equity owners. The company is moving forward on developing its LNG portfolio, including its ECA LNG export facility.
ECA LNG Phase 1 — a joint venture between Sempra Infrastructure and TotalEnergies (TTE) — will be a single-train liquefaction facility with a capacity of approximately 3.25 million tons per year of LNG. First production of LNG is expected by the end of 2024.
This project is unique in that it is slated to be the first Pacific Coast LNG export project with direct access to natural gas supplies in Texas and the western U.S.
Meanwhile, on May 16, Sempra Energy said it entered a preliminary arrangement to provide an annual two million tons of LNG for 20 years to Polish energy company PGNiG, from its Cameron LNG project. Then on May 25, Sempra announced it had entered into a heads of agreement (HOA) with RWE Supply & Trading, a subsidiary of Germany's RWE (RWEOY), for the purchase of 2.25 million tons per year of liquefied natural gas.
What Comes Next for Sempra?
Sempra management expects long-term earnings growth to be driven by the company's five-year, $36 billion capital spending plan. Sempra Infrastructure is focused on natural gas expansion, with seven pipeline projects in development or under construction.
I expect earnings to benefit from the company's focus on its utilities business, as well as from higher LNG exports in 2022. Adjusted earnings estimates for this year are $8.60 a share. There should be further growth in 2023, driven by higher natural gas demand at the company's utilities.
Sempra continues to buy back stock, and has returned $750 million to shareholders through buybacks over the last six months. It also pays a dividend with a yield of about 2.75%, in line with the peer average.
Sempra expects to pay out approximately 55% of earnings through dividends on average the next five years. It may even be a touch higher considering the high quality and relatively stable nature of Sempra's regulated assets combined with its long-term contracted LNG assets. Sempra's stock is a buy in the $160 to $170 range.